TEXT - S&P rates Speedway Motorsports

Reuters Staff

10 Min Read

Overview
-- U.S.-based speedway operator Speedway Motorsports Inc.
(SMI) plans to issue a $100 million add-on to its existing $150 million 6.75%
notes due 2019.
The company will use proceeds to repay the outstanding balance on the
company's existing term loan due 2015.
-- The company also plans to enter into a new $100 million revolving
credit facility and a $250 million delayed draw term loan, both due 2018. The
company will use the term loan proceeds to help repay the $275 million 8.75%
notes due 2016, when they become callable in June 2013.
-- We are placing the ratings on the company's 6.75% senior notes and
8.75% senior notes on CreditWatch with negative implications. We are also
rating the company's new credit facility 'BBB-', with a recovery rating of '1'.
-- The stable rating outlook reflects our view that a high proportion of
contractually increasing and recurring revenues from broadcasting can
sufficiently offset the potential for a slow recovery in admissions revenue
and support credit measures consistent with our 'BB' rating.
Rating Action
On Jan. 8, 2013, we placed our issue-level ratings on U.S.-based Speedway
Motorsports' 6.75% and 8.75% senior notes on CreditWatch with negative
implications. Upon closing of the 6.75% senior notes add-on and the new credit
facilities, we expect to revise our recovery rating on the senior notes to '5'
(10% to 30% recovery expectation) from '3' (50% to 70% expectation). In
addition, we expect to lower our issue-level rating on the senior notes to
'BB-' from 'BB', in accordance with our notching criteria. Proceeds from the
$100 million senior notes add-on will be used to repay the outstanding $100
million term loan.
Additionally, we are assigning the company's new $350 million credit facility
(consisting of a $100 million revolver and $250 million delayed draw term
loan, both due 2018) our 'BBB-' issue-level rating, with a recovery rating of
'1', indicating our expectation for very high (90% to 100%) recovery in the
event of a payment default. The company will use the term loan proceeds to
help fund the redemption of the $275 million 8.75% senior notes due 2016 when
they become callable in June 2013. The net increase in the term loan results
in a higher level of secured debt outstanding under our simulated default
scenario versus our previous analysis. This reduces the recovery prospects for
the senior notes enough to warrant a negative revision to our recovery rating
on the senior notes. Our ratings on the 8.75% senior notes will be withdrawn
when the issue is redeemed.
Rationale
The corporate credit rating on Charlotte, N.C.-based Speedway Motorsports
(SMI) reflects Standard & Poor's Ratings Services' assessment of the company's
business risk profile as "fair" and our assessment of the company's financial
risk profile as "significant," according to our criteria.
Our assessment of SMI's business risk profile as fair reflects its reliance on
an event-driven business model, the susceptibility of much of its revenue base
to the economic cycle, and the existence of substitute entertainment events.
Partially offsetting these risks are the company's strong EBITDA margins, good
market position in the motorsports industry, and high barriers to entry
stemming from significant capital costs for new racetracks and a limited
supply of high-margin NASCAR racing dates. Additionally, SMI's business risk
profile benefits from good revenue visibility from contracted NASCAR
broadcasting revenue. While the existing contract is set to expire in 2014, in
October 2012, Fox agreed to increase its aggregate payment to NASCAR by
approximately 36% for a new 2015-2022 contract that includes broadcasting
rights to the first 13 Sprint Cup races of the season. However, NASCAR
viewership can be volatile and was down about 10% in 2012, and Fox represents
only one portion of the annual NASCAR television rights. NASCAR's contract
with current partners ESPN and Turner also ends after the 2014 season, and
there is yet no indication that those networks will negotiate similar payment
increases.
Our assessment of SMI's financial risk profile as significant reflects
leverage that we expect to remain in the mid-3x area through 2014, interest
coverage of over 5x after giving effect to the interest savings associated
with the proposed refinancing, and positive free operating cash flow. If the
remainder of the 2015-2022 NASCAR seasons are negotiated at least as favorably
as the Fox contract, and admissions revenues stabilize, we would expect
associated EBITDA improvement to lead to sustainably lower leverage and
possibly a higher financial risk assessment.
Through September 2012, contracted NASCAR broadcasting revenue which
represented about 40% of revenue for the period, was up about 4%, but ticket
price discounting in order to spur attendance continued to drag on revenues ,
resulting in an overall decline of about 2%, in line with our full-year
forecast for a low-single-digit percentage revenue decrease in 2012. Given
SMI's relatively high fixed costs, margins have remained under pressure.
EBITDA was down about 9% year to date September 2012, moderately higher than
our prior expectations for a mid-single-digit decline in 2012. We now expect a
low-double-digit percent decline in EBITDA for 2012.
For 2013 and 2014, the existing NASCAR broadcasting contract will provide a
stable source of cash flow, increasing on average by 3% per year through 2014.
We expect that SMI will continue to discount ticket prices until the economic
situation of its fans improves and that the built-in broadcasting revenue
increases can sufficiently offset the potential for a slow recovery in
admissions revenue. As a result, for 2013 and 2014 we have assumed a
low-single-digit percentage growth in revenues and EBITDA.
Liquidity
We are revising our liquidity descriptor for SMI to "adequate" from "less than
adequate," based on our expectation that financial covenants in SMI's new
credit agreement will be set with at least a 15% cushion relative to
thresholds. Our assessment of SMI's liquidity profile incorporates the
following expectations and assumptions:
-- Based on our current performance expectations, we expect SMI's sources
of liquidity to exceed its uses by over 1.2x. We believe sources would exceed
uses, even if forecasted EBITDA declines by more than 15%.
-- Sources of liquidity should exceed uses by over 1.5x over the next 12
to 18 months, and should do so even if EBITDA declines by 30%.
Pro forma for the refinancing, cash sources will include approximately $90
million of cash and about $60 million of availability under the new $100
million revolver. We expect operating cash flow to be about $100 million over
each of the next two years, which should be sufficient to fund capital
expenditures of $30 million, required amortization of the term loan, modest
share repurchases, and the existing dividend. The first debt maturity is 2018,
when the new revolver and term loan expire.
Recovery analysis
Please see our full recovery report, to be published as soon as possible after
this press release.
Outlook
The stable rating outlook reflects our view that a high proportion of
contractually increasing and recurring revenues from broadcasting through 2013
and 2014 can sufficiently offset a slow recovery in admissions revenue and
support credit measures consistent with our 'BB' rating.
We could lower our rating if admissions revenue declines substantially (likely
from worsening economic conditions), or if 2013 viewership is weak as it was
in 2012, possibly signaling a secular shift of interest away from NASCAR
events. Such scenarios could weaken NASCAR's negotiating position with
broadcasters for what remains of the 2015-2022 seasons.
Based on our assessment of SMI's business risk profile as fair, a higher
rating would be contingent upon our expectation that leverage could be
sustained below 3x, a scenario we view as possible if the remaining broadcast
negotiations are favorable to the track operators. Our consideration of a
higher rating would also be contingent on stabilization of attendance revenues.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List
Ratings Unchanged
Speedway Motorsports Inc.
Corporate Credit Rating BB/Stable/--
New Rating
Speedway Motorsports Inc.
Speedway Funding LLC
Senior Secured
$250M delayed draw term loan due 2018 BBB-
Recovery Rating 1
$100M revolver due 2018 BBB-
Recovery Rating 1
Ratings Affirmed; CreditWatch Placement
To From
Speedway Motorsports Inc.
Senior Unsecured
$275M 8.75% sr nts due 2016 BB/Watch Neg BB
Recovery Rating* 3 3
$250M 6.75% sr nts due 2019 BB/Watch Neg BB
Recovery Rating* 3 3
*Standard & Poor's does not place its recovery ratings on CreditWatch;
however, this does not preclude our recovery assessment from potentially
changing in the future.